09 pt costing systems techniques v3

8/12/2019 09 PT Costing Systems Techniques v3

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By the end of this session youwill be able to:

Identifyand briefly describe three costing

systems.Undertake andevaluate a simple costingexercise.

Describethe three elements of cost and howthese may be applied.

Identifyapportionment techniques as a meansof determining cost by cost centre and byproduct

Peter G Tull November 2010

Business Management Techniques

HNC / HND ElectricalAero - Mechanical Engineering


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HNC / HND Electrical

Aero - Mechanical Engineering

Peter G Tull September 2010

Assignment Brief:


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What is costing?

Costing can be defined as the process of

analysing expenditure of a business unit

into the separate costsfor each of the

products or services which the business

supplies to its customers

Put simply costing is the process of

calculating how much something coststo make.





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Engineers role

The engineers role in costing is important;

he must know how much a product costs

to make in order to determine a realistic

selling pricei.e. a selling price that willproduce a profit.





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Some costing systems

Examples of costing systems:

Job costing; applied to a unique operation

such as a one-off job.

Parts costing; determine the cost of all the

physical parts and components in a product

Process costing; takes into account the cost

of continuous manufacturing process andapportionsparts of the cost of each process

to an individual product.





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Job costing exercise:





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Three elements

Costs consist of three elements: Labour costs

Material costs

Overhead costs(or expenses) Labourpayments to the businesss employees

Materialsthe physical goods consumed inmaking a supply to a customer.

Overheadsother resources consumedincluding rent, power, services of otherbusinesses, depreciation





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Three elements cont/

These threeelements can be furtherdivided into:

direct costs(also known as variable costs)

indirect costs(also known as fixed costsoroverheads

In o rder to arr ive at the correct co st fo rmaking a produc t the ind irect cos ts

need to be addedto the direct costs o f

making the product .





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Overheads

Two costing methods that are used toaccommodate overheads are:

Absorption costing

Absorption costing takes account of the full cost ofproviding the goods or services; the overheads for aspecific period are absorbed to the units in variousways.

Marginal costing Marginal costing takes account of the variable cost

of products and excludes fixed costs from thedecision-making process





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Indirect costs

Indirect costs are also known as fixed

costs or overheads.

They are costs that remain unchanged by

the level of activity. (e.g. volumes)

To arrive at the correct cost of a product

the indirect costs need to be added to the

direct costs. This is done in a

proportionateway.


Aero - Mechanical EngineeringPeter G Tull September 2010


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Apportionment

Two methods of apportionment are:

Apportionment to cost centres (floor area,

number of employees, etc.).

Apportionment to the product (labour,

machine hours, etc.); also called overhead

absorption.

Other methods include direct material,direct wages (similar to direct labour hour)

and cost unit.




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Apportionment exercise:




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By Cost centre

by Product

Summary



Costing

Methods

Apportionment

Process

Job costing

Parts costing

Process costing

1 Direct Labour

2 Direct materials

3. Overheads / indirect

Cost Element

Direct Cost

(Variable)

Indirect Cost

(Fixed)Total Cost =

Variable costs + Fixed costs

(overheads)

apportioned

Absorption

Marginal

or


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Absorption base

Choosing the appropriate absorption base

requires judgement and common sense

You want to reflect the characteristics of the cost

centre in the absorption base Example:

Direct labour ratesuitable in a labour intensive cost

centre which has a good time recording system

Machine hour ratesuitable in a mechanised cost

centre where a lot of the overheads relate to use of

machinery e.g. power, repairs, depreciation




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Next week:

Recap on this week

Class assignment and or Quiz

Discuss examples of Marginal Costingapplications. (Homework!)




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Summary:

Identifyand briefly describe threecosting systems.

Undertake andevaluate a simple costingexercise.

Describethe three elements of cost andhow these may be applied.

Identifyapportionment techniques as ameans of determining cost by cost centreand by product

Peter G Tull November 2010


HNC / HND ElectricalAero - Mechanical Engineering

09 pt costing systems techniques v3

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